Simple minded flat tax

“Flat-tax proposals may fall flat for Perry and Cain

By Jia Lynn Yang, Published: October 20

With Herman Cain and now Texas Gov. Rick Perry touting a single rate for all taxpayers, the flat tax is enjoying a moment in the political spotlight not seen since the 1990s.

But history shows that those who propose the flat tax while running for president — a group that includes publisher Steve Forbes, Sen. Phil Gramm (R-Tex.) and California Gov. Jerry Brown (D) — tend to flame out. The flat tax is appealing at first to voters for its simplicity, but the very thing that makes it popular also makes it politically treacherous.

The allure of the flat tax is that it promises to wipe clean the complicated tax code. But it does this by throwing out some popular tax deductions, including breaks for mortgage interest payments, charitable giving and employer-paid health care.

The details of each flat-tax proposal differ — the overall rate, whether some low-income families would be exempt and which deductions might be spared on the chopping block. But experts say they invariably increase taxes on lower-income households and cut them for the rich, a potentially dicey proposition for voters worried about the country’s decades-long trend of growing income inequality.

Cain’s “9-9-9” plan — which proposes a 9 percent personal income tax, a 9 percentbusiness tax and a 9 percent national sales tax — has come under fire. An analysis by the nonpartisan Tax Policy Center found that it would raise taxes on 84 percent of U.S. households. Perry won’t say more about his flat-tax proposal until next week. Mitt Romney has stayed away from the flat tax, saying Thursday that you have to make sure it “doesn’t raise taxes on middle-income Americans.”

The flat-tax idea goes back to the early 1980s, when two economists at the Hoover Institution, Robert Hall and Alvin Rabushka, wrote the book “The Flat Tax.” Hall and Rabushka proposed charging a 19 percent tax on all businesses and individuals, excluding families of four making less than $25,500. The plan stripped all deductions from the code. Only wages and pension benefits would be taxed; profits from investments, known as capital gains, would not be taxed at all.

Their ideas became the basis for many proposals. Rep. Richard K. Armey (R-Tex.) pushed for a flat tax when he was House majority leader in the 1990s. In the 1996 GOP presidential primary, Gramm and Forbes presented dueling flat-tax proposals; Gramm said he would tax income at 16 percent, compared with Forbes’s 17 percent rate. (Perry has cited Gramm as “a mentor to me in Texas politics.”)

The problem that many plans run into is that people want to tear up the current tax code until they learn they might pay more taxes in the new one.

“The attractiveness of any flat-tax plan is extremely sensitive to the rate. Twenty percent is about the most you can get people to support,” said Bruce Bartlett, a former adviser to President Ronald Reagan and a Treasury official in the George W. Bush administration. “You get much above that and people figure they’re better off with the current system.”

Like Cain, Forbes rode his flat-tax idea to unexpected heights during the 1996 campaign. But Bartlett said his fixation on the tax plan meant that voters didn’t know what else to make of him.

“Part of Forbes’s problem was he was a ‘Johnny One Note’ and he really didn’t have much to say about foreign policy or defense or education or all the other issues that people elect presidents to do,” Bartlett said.

Lawmakers have leaned more heavily in recent years on the tax code as a tool for certain policy goals; for instance, by using the mortgage interest deduction to encourage homeownership. And that would be a tough habit to break.

“Just because you pass a flat tax doesn’t mean the laws of politics have been permanently repealed,” said Martin Sullivan, a tax analyst.

The issue of whom to tax and how much has grown more charged as income inequality worsens. Median pay for corporate executives at large companies has more than quadrupled since the 1970s, even after adjusting for inflation, researchers say. Meanwhile, pay for non-supervisory workers has dropped more than 10 percent, according to the Bureau of Labor statistics.

“At least, in theory, it’s a simple plan, but getting from here to there would be enormously complex,” Bartlett said.”